Gasoline Price Explained

           A few weeks before the election in the U.S.,  gasoline prices began to drop a bit.  Now, everyone knows that voters are more likely to re-elect the party in power when prices are stable--and less likely to do so if prices, especially fuel prices, are high and rising.  So everyone had a theory as to who was manipulating  prices for political purposes. The right wing pundits suggested that Obama was secretly releasing oil from the strategic reserve to buy votes.  My own theory was that the oil barons, although they do not particularly like Obama, realized that the alternative to his being re-elected was to actually have Mitt Romney as President, a prospect which scared the hell out of them.  And so they were trying to beat down the gas price to prevent Romney's election.

            But after sober reconsidering, I realize that no person or agency was manipulating anything at all.  What happened is that in the northern temperate zone, where most of the world's cars are,  winter fuel blend is not the same as summer fuel.   About mid-October, the refineries briefly shut down and re-tool to make winter blend gasoline.  This fuel is lighter and will vaporize at a lower temperature. Back when we used engines with carburetors, this lighter fuel was absolutely necessary for cold weather starting. But in extreme cold weather, even cars with modern fuel injection systems may require a lighter mix to run well.  So about mid-October, we all start buying a different fuel.   The oil companies love this because this lighter blend of hydrocarbons weighs less per gallon, and they can get a few more gallons per barrel of crude oil.  But by dumping more gallons on the market, this bids the price down. 

            And of course, we consumers are delighted to have a lower price.  But nowadays,  a lot of cars are equipped  with a digital readout on the dashboard with gives an instantaneous estimate of fuel consumption in miles per gallon.   And as soon as you start burning winter gas, you notice that the gas you paid 10% less for will also give you 10% fewer miles per gallon.  Why?  What happens is that fuel consumption per pound (or per kilogram) remains exactly the same, but there are fewer pounds per gallon ( grams per liter).  If fuel were priced per pound instead of per gallon, the price and gas millage would have remained unchanged.

            This change in mass density of the fuel would itself have explained a 10% drop in price.  But by today, the total price decrease in my area has been about 14%.  The additional 4% is due to the fact that in cold weather, people drive less.  If you live in the "frost belt", there aren't many things to do or places to go in cold weather that would actually be a pleasant experience, so people stay home as much as possible.  And with fewer gallons of gas sold, normal supply and demand factors have depressed the price.

            When we feel miserable, we try to put a face on our problem.  We look for an "oil executive in the woodpile".    We like to identify some particular individual or institution to blame for our misfortune.  But sometimes our fortunes are tied to the impersonal forces of supply and demand.  Do not think I am championing the value of "free markets."  Having watched market forces all my life, I can assure you that except perhaps for John Maynard Keynes, no man ever lived who had a lower opinion of "the market."  Schumpeter believed that markets cause "creative destruction."   He was partly right.  Market forces are almost always destructive--but not always creative.  When we say we have free market forces, that is merely a polite way of saying that we have  chaos.  There was a time when Saudi Arabia could control the price of crude oil. And there was a time when the US, acting as the world's largest consumer, could also dictate the price of crude. In the 90s, the U.S.  broke the price of crude oil simply by using less.  But with China entering the market, those days are gone. Today, no one controls the market--it's simply chaos.  But with chaos, at least no one is in charge of it.